Levine on Wall Street: The Bond King and Mr. X

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Pimco's office politics were pretty wild.

The Pimco Total Return Fund saw $9.5 billion in withdrawals in November, down from a combined $51 billion in September and October but still, you know, net withdrawals. But it outperformed 99 percent of peers in November (with 0.82 percent monthly returns), and is now above average for the year. The corner has been turned, and now all Pimco needs is for clients to catch up. "We’re talking about investments again" in client meetings, says one of Total Return's managers, instead of "questioning events of a couple of months ago."

They're missing out! Events of a couple of months ago were hilarious! Here is a pretty amazing account of Bill Gross's fall at Pimco, of which perhaps my favorite moment was when Bill Gross "spent more than 20 minutes before a firm-wide meeting to discuss the media scrutiny that had beset the company, a speech in which he disparaged El-Erian." Somehow this speech got him a standing ovation, but managing director Joshua Thimons "disagreed with his comments and refused to stand." One, what a beautifully passive-aggressive place. But two, in his hunt for the person who was leaking to the media, whom he called "Mr. X" for some reason,

Gross set up interrogations of members of the investment committee, managing directors, and lower-ranking money managers. He carried around a three-ring binder of printed-out e-mails and hand-written notes to find out who was talking to the press.

Among his suspects were Balls, a former journalist, and Thimons, the executive who had remained seated during the standing ovation and who had organized a going-away party for El-Erian. 

What on earth? Later, "Gross devised a seating plan for a meeting of portfolio managers" in which several of his enemies had to sit in "the rows of the conference room instead of at the main table," which "was perceived as a snub." You can see why Pimco's managers would be excited to discuss investments again, instead of, you know, who applauded which speech and who went to whose party and who got to sit where at meetings.

How much is Uber worth?

It's apparently raising money at a $35 to $40 billion valuation, but Aswath Damodaran runs the numbers and gets a range of ... hmm, "$799 million to $90.5 billion," hmm. He says, "you may find your worst fears about DCF models, i.e., that they can be used to deliver whatever number you want, vindicated." But $35 to $40 billion is right in the sweet spot I guess. We talked yesterday about Uber's private-wealth fundraising round and it's important to note that that round (unlike, apparently, the near-simultaneous institutional round) is not at any valuation at all: It's a convertible note that converts at a pre-set discount to the eventual initial public offering price, meaning that you get a fixed return if there's any acceptable IPO in the next few years, whether that's at a $20 or $40 or $90.5 billion valuation. (A $799 million IPO valuation will probably impair your return.) So that instrument does not imply any valuation, or put any constraints on your ability to imagine that Uber is worth whatever you want it to be worth.

How much was Tibco worth?

Here is Ronald Barusch on the embarrassing Tibco Software deal, in which Tibco and its advisers at Goldman Sachs got the share count wrong and so thought that Vista Equity Partners was paying $100 million more for Tibco than it actually was. There is much delight here, but I want to focus on this:

That the error could be made repeatedly and by so many players is all the more surprising in that the merger agreement signed on September 27 contains a representation on Tibco’s capitalization which could not be clearer on the need to avoid double counting:  “it being understood that of [the shares reserved for employee plans], 4,147,144 of such shares relate to restricted stock that is included in” the number of outstanding shares.

What that tells you is:

  • The lawyers knew how to count correctly.
  • The bankers did not.

You don't see that particular breakdown of roles all that often!  Also good: When the error was discovered, the board met to decide what to do (and whether to demand a higher price per share), but "no member of the board asked Goldman how the error was made" or whose fault it was. According to a Goldman banker's testimony. If I were the guy who messed up the share count I probably wouldn't remember much of that meeting myself.

Some words not to put in e-mail.

"Where are you guys finding all this," one Credit Suisse banker asked another, ending the sentence with a word that you shouldn't even put in a linkwrap. "You must have the biggest and deepest dredge known to man kind." The first banker responded, "I will go wherever I can find a fee." The fee-hunter was also praised for his "creativity," which is another alarm-bell word. They meant his creativity in sourcing pre-crisis loans and then selling them based on unconventional appraisal methodologies; the loans went bad, the investors are suing Credit Suisse, and I don't really know or care that much about the substance but it is always harder to argue about the good faith of your loans when you have e-mails from your own bankers calling them naughty words.

Central bankers and regulation.

First, here is Anne Le Lorier of the Bank of France on "Bailouts, bail-in and financial stability." Here is a good passage (via) on the costs and benefits of too-big-to-fail:

These reforms will impose higher costs on systemic institutions compared to their non-systemic (smaller) peers. The logic makes perfect sense when one considers each reform separately, since the objective is to eliminate/compensate the competitive advantage that these institutions derive from expectations of public support. However, the result of adding up all measures may be to turn a gross competitive advantage into a net competitive disadvantage.

Although one might see this as a welcomed outcome, I see at least two reasons that could mitigate this view:

First, this cumulative regulatory cost could lead banks to operate below the economically optimal scale and scope, and withdraw from the provision of activities important for international firms and globalized financial markets. I have no preference for big systemic banks. But I simply do not believe that these large financial institutions became large and complex simply to benefit from the implicit subsidy.

Alternatively, this could lead to even more concentration among systemic institutions themselves, as some attempt to secure higher public support probabilities to compensate for the higher regulatory burden. Unless public authorities suddenly find a way to credibly commit to no bailouts whatsoever, we may well end up at some point with a world with fewer but more systemically important systemic players. And I am not convinced that a world with five G-SIBs instead of the current list of thirty would necessarily be more stable.

Next, New York Fed President and former Goldman Sachs partner William Dudley "said there isn't really a revolving door between his bank examiners and the financial firms they oversee," har har har, but notice that he's talking specifically about examiners. Consider Dan Davies's critique of bank examiners, which is "that the biggest problem is that senior management of bank supervisors don’t have the supervisors’ backs"; do you feel good about the senior managers coming from the supervised banks while the examiners mostly don't? Finally, here is Breakingviews on "Wall Street's top brass" feeling "nostalgia for their former overlord, Tim Geithner," who it should be said was not a Goldman Sachs partner (though he was a New York Fed president).

Lending and information.

"A 2006 reform introduced by the State Bank of Pakistan (SBP) reduced the amount of public information available to Pakistani banks about a firm’s creditworthiness," and researchers at the SBP and the Federal Reserve studied what happened next:

We empirically show those banks with private information about a firm lent relatively more to that firm than other, less-informed banks following the reform. Remarkably, this reduction in lending by less informed banks is true even for banks that had a pre-existing relationship with the firm, suggesting that the strength of prior relationships does not eliminate the problem of imperfect information.

"The model suggests that the reduction in public information leads to a negative welfare effect."

Some double dealing.

"He who sells what isn't his'n, must buy it back or go to pris'n," is a thing people say about short selling, which is selling stock you don't own in a bet that it will go down. But here is a guy who (allegedly) just sold stock he didn't own -- in a private company with the inauspicious name CSS Corp. Technologies (Mauritius) Limited -- so he could, you know, take the money and buy things. It wasn't a bet that the stock would go down; it was just a bet that he wouldn't get caught. Rather than buy the stock back, he allegedly "provided the true owners of the shares with fake updates on their investments for more than a year after he had disposed of their stock." He also "lied to CSS's transfer agent, saying that new stock certificates should be issued to the new buyers and that the original stock certificates had been lost," presumably so he could have certificates to show both the buyers and the original owners. I think a lot about the taxonomy of financial scams to try to figure out which one would be easiest. Selling stock you don't own sounds sort of neat and clean, easier than pump-and-dumping stock you do own, but this particular case does seem to have required a lot of work to gain the actual owners' trust, trick the transfer agent, etc. (Obviously the easiest and best scam is to receive an erroneous wire transfer and flee the country, and that's the one in which I put most of my hopes.) 

Things happen.

TARGET2 explained with fairies. Amazon.com is rated AA-/Baa1. Remember that insider trading in commodities is legal and couldn't be otherwise. Nelson Peltz got a board seat at Bank of New York Mellon. Battlecat Oil & Gas is raising money. A small oil and gas company called First Sahara Energy just changed its name to M Pharmaceutical Inc. "in conjunction with its decision to pursue interests in pharmaceuticals and biomedical devices," instead of oil and gas. Citi will shut down the LavaFlow ECN. Congrats to Pace University, which won the College Fed Challenge. Law firms are paying big bonuses, for law firms. The Political Economy of Bitcoin. The Trump Taj Mahal is in bad shape. Nobody knows what a Millennial is.

  1. Disclooooooosure: I'm a former banker and a former lawyer. Specifically I was once a banker at Goldman Sachs, where I occasionally got share counts wrong. When I was a lawyer I never got share counts wrong. That I know of.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net